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India set to become a $2-trillion economy!

Last updated on: March 7, 2011 15:19 IST

India set to become a $2-trillion economy!

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Business Standard


India is poised to join the coveted club of economies whose national income, or gross domestic product, exceeds $2 trillion.

According to recently released data, India's nominal GDP is expected to grow at 14 per cent in 2011-12, to reach Rs 90 lakh crore (Rs 90 trillion). At a dollar exchange rate of Rs 45, this works out to $2 trillion.

However, if inflation is assumed to be 7 per cent and the real growth rate is 9 per cent as projected, the growth rate of 14 per cent may actually understate nominal growth rate by 2 percentage points, which means India's nominal GDP in dollar terms will actually exceed $2 trillion this fiscal!

India's nominal GDP crossed the $1-trillion mark in 2007-08, which implies GDP has doubled in four years.

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Photographs: Reuters
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Applying the 'rule of 72' would mean India's average annual growth rate of nominal GDP during the period is a stupendous 18 per cent!

That it was achieved in a milieu of pervasive economic gloom makes the feat even more impressive.

Amidst the prevailing euphoria, it may be time to take a pause. The future may well be less perfect than we imagined.

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Photographs: Reuters
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First, the magic number of $2 trillion is based on an exchange rate of $45 to the dollar. If the rupee were to depreciate, India's nominal GDP would be lower for the same level of output.

Second, in celebrating the nominal as opposed to the real GDP, we may be losing sight of the contribution of inflation.

The difference between real and nominal GDP is inflation, and so for a given level of real GDP, the higher the inflation the more rapidly would nominal GDP increase. This is clearly an undesirable outcome for everybody.

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Photographs: Reuters
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Statistical convolutions aside, the health of the Indian economy needs a candid review, particularly in light of potential downsides that could derail the genuine progress the Indian economy has made over the past two decades.

The slowdown in virtually all sectors of the economy, barring a few select industries like 'transport, logistics and communication', which has been growing annually at 25 per cent, is indeed worrisome.

Growth in the agriculture sector continues to be dampened by under-investment, despite some increase during the past five years. This has resulted in the sector being caught in a classic low productivity trap.

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Manufacturing too is spinning on its wheels, with annual growth rates stubbornly in the single digits. This reflects deeply embedded structural problems, which have been discussed in this space.

India's economic growth continues to rely on the service sector growing at or around 10 per cent annually, which renders it vulnerable to global shocks.

The situation on the supply side also leaves a lot to be desired. This particularly applies to the tardy progress in the development of infrastructure and investment in human development, which is already holding India back.

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Apart from the bottlenecks and the shortcomings that are holding India back, the recent spurt in growth has also been accompanied by increased inequality, with the rich becoming richer.

Hence, even as India pursues policies that enhance and sustain growth, there is a need to ensure greater equity in the growth process.

India has much to celebrate by way of economic progress, but there is still some way to go in making this growth process more socially, economically and regionally inclusive.


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